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By G. C. Selden 

Author of " Trade Cycles," M What Makes the Market ? ' 







THIS book is based upon the belief that the 
movements of prices on the exchanges 
are dependent to a very large degree on the 
mental attitude of the investing and trading 
public. It is the result of years of study and 
experience as fellow at Columbia University, 
news writer, statistician, on the editorial staff 
of The Magazine of Wall Street, etc. 

The book is intended chiefly as a practical 
help to that considerable part of the com- 
munity which is interested, directly or in- 
directly, in the markets ; but it is hoped that it 
may also have some scientific value as a pre- 
liminary discussion in a new field, where op- 
portunities for further research seem almost 
unlimited. G. C. Selden. 

New York, May 28, 1912. 

Copyright 1912 
Ticker Publishing Company 


I. The Speculative Cycle 9 

II. Inverted Reasoning and Its Con- 

sequences 27 

III. "They" 39 

IV. Confusing the Present with the 

Future — Discounting 55 

V. Confusing the Personal with the 

General 71 

VI. The Panic and the Boom 87 

VII. The Psychology of Scale Orders 101 

VIII. The Mental Attitude of the 

Individual 109 

I— The Speculative Cycle 

MOST experienced professional 
traders in the stock market will 
readily admit that the minor 
fluctuations, amounting to perhaps five 
or ten dollars a share in the active 
speculative issues, are chiefly psycho- 
logical. They result from varying atti- 
tudes of the public mind, or, more 
strictly, from the mental attitudes of 
those persons who are interested in the 
market at the time. 

Such fluctuations may be, and often 
are, based on "fundamental" condi- 
tions — that is, on real changes in the 
dividend prospects of the stocks af- 
fected or on variations in the earning 
power of the corporations represented 
— and again they may not. The broad 
movements of the market, covering 
periods of months or even years, are 
always the result of general financial 


conditions; but the smaller intermedi- 
ate fluctuations represent changes in 
the state of the public mind, which 
may or may not coincide with altera- 
tions in basic factors. 

To bring out clearly the degree to 
which psychology enters into the stock 
market problem from day to day, it is 
only necessary to reproduce a conver- 
sation between professional traders 
such as may be heard almost any day 
in New street or in the neighboring 

"Well, what do you know?" says one 
trader to the other. 

"Just covered my Steel," is the reply. 
"Too much company. Everybody 
seems to be short." 

"Everybody I've seen thinks just as 
you do. Each one has covered be- 
cause he thinks everybody else is short 
— still the market doesn't rally much. 
I don't believe there's much short in- 
terest left, and if that's the case we 
shall get another break." 

"Yes, that's what they all say — and 


they've all sold short again because 
they think everybody else has covered. 
I believe there's just as much short 
interest now as there was before/' 

It is evident that this series of inver- 
sions might be continued indefinitely. 
These alert mental acrobats are doing 
a succession of flip-flops, each one of 
which leads up logically to the next, 
without ever arriving at a final stop- 

The main point of their argument is 
that the state of mind of a man short 
of the market is radically different from 
the state of mind of one who is long. 
Their whole study, in such a conversa- 
tion, is the mental attitude of those in- 
terested in the market. If a majority 
of the volatile class of in-and-out trad- 
ers are long, many of them will hasten 
to sell on any sign of weakness and 
a decline will result. If the majority 
are short, they will buy on any develop- 
ment of strength and an advance may 
be expected. 

The psychological aspects of specula- 


tion may be considered from two points 
of view, equally important. One ques- 
tion is, What effect do varying mental 
attitudes of the public have upon the 
course of prices? How is the character 
of the market influenced by psycholog- 
ical conditions? 

A second consideration is, How does 
the mental attitude of the individual 
trader affect his chances of success? 
To what extent, and how, can he over- 
come the obstacles placed in his path- 
way by his own hopes and fears, his 
timidities and his obstinacies? 

These two points of view are so 
closely involved and intermingled that 
it is almost impossible to consider 
either one alone. It will be necessary 
to take up first the subject of specu- 
lative psychology as a whole, and later 
to attempt to draw conclusions both 
as to its effects upon the market and 
its influence upon the fortunes of the 
individual trader. 

As a convenient starting point it may 
be well to trace briefly the history of 


the typical speculative cycle, which 
runs its course over and over, year after 
year, with infinite slight variations but 
with substantial similarity, on every 
stock exchange and in every specula- 
tive market of the world — and presum- 
ably will continue to do so as long as 
prices are fixed by the competition of 
buyers and sellers, and as long as hu- 
man beings seek a profit and fear a loss.* 
Beginning with a condition of dull- 
ness and inactivity, with small fluctu- 
ations and very slight public interest, 
prices begin to rise, at first almost im- 
perceptibly. Xo special reason appears 
for the advance, and it is generally 
thought to be merely temporary, due to 
small professional operations. There 
is, of course, some short interest in the 
market, mostly, at this time, of the 
character sometimes called a "sleeping" 

*The writer discussed this subject rather fully in 
the Quarterly Journal of Economics, Vol. XVI, No. 2. 
The article will also be found extensively summarized 
and quoted in Vol. VII of "Modern Business," edited 
by Joseph French Johnson, Dean of New York Uni- 
versity School of Commerce. 


short interest. An active speculative 
stock is never entirely free from shorts. 

As there is so little public specula- 
tion at this period in the cycle, there 
are but few who are willing to sell out 
on so small an advance, hence prices 
are not met by any large volume of 
profit-taking. The smaller profes- 
sionals take the short side for a turn, 
with the idea that trifling fluctuations 
are the best that can be hoped for at 
the moment and must be taken advan- 
tage of if any profits are to be secured. 
This class of selling brings prices back 
almost to their former dead level. 

Soon another unostentatious upward 
movement begins, carrying prices a 
trifle higher than the first. A few 
shrewd traders take the long side, but 
the public is still unmoved and the 
sleeping short interest — most of it orig- 
inally put out at much higher figures — 
still refuses to waken. 

Gradually prices harden further and 
finally advance somewhat sharply. A 
few of the more timid shorts cover, per- 


haps to save a part of their profits or 
to prevent their trades from running 
into a loss. The fact that a bull turn 
is coming now penetrates through an- 
other layer of intellectual density and 
another wave of traders take the long 
side. The public notes the advance and 
begins to think some further upturn 
is possible, but that there will be plenty 
of opportunities to btry on substantial 

Strangely enough, these reactions, ex- 
cept of the most trifling character, do 
not appear. Waiting buyers do not get 
a satisfactory chance to take hold. 
Prices begin to move up faster. There 
is a halt from time to time, but when 
a real reaction finally comes the market 
looks "too weak to buy," and when it 
starts up again it often does so with a 
sudden leap that leaves would-be pur- 
chasers far in the rear. 

At length the more stubborn bears 
become alarmed and begin to cover in 
large volume. The market "boils," and 
to the short who is watching the tape, 


seems likely to shoot through the ceil- 
ing at almost any moment. However 
firm may be his bearish convictions, his 
nervous system eventually gives out un- 
der this continual pounding, and he 
covers everything "at the market" with 
a sigh of relief that his losses are no 

About this time the outside public 
begins to reach the conclusion that the 
market is "too strong to react much," 
and that the only thing to do is to "buy 
'em anywhere." From this source 
comes another wave of buying, which 
soon carries prices to new high levels, 
and purchasers congratulate themselves 
on their quick and easy profits. 

For every buyer there must be a 
seller — or, more accurately, for every 
one hundred shares bought one hundred 
shares must be sold, as the actual num- 
ber of persons buying at this stage is 
likely to be much greater than the num- 
ber of persons selling. Early in the 
advance the supply of stocks is small 
and comes from scattered sources, but 


as prices rise, more and more holders 
become satisfied with their profits and 
willing to sell. The bears, also, begin 
to fight the advance by )ap selling short 
on every quick rise. A stubborn pro- 
fessional bear will often be forced to 
cover again and again, w T ith a small 
loss each time, before he finally locates 
the top and secures a liberal profit on 
the ensuing decline. 

Those selling at this stage are not, 
as a rule, the largest holders. The larg- 
est holders are usually those whose 
judgment is sound enough, or whose 
connections are good enough, so that 
they have made a good deal of money ; 
and neither a sound judgment nor the 
best advisers are likely to favor selling 
so early in the advance, when much 
larger profits can be secured by simply 
holding on. 

The height to which prices can now 
be carried depends on the underlying 
conditions. If money is easy and gen- 
eral business prosperous a prolonged 
bull movement may result, while 


strained banking resources or depressed 
trade will set a definite limit to the 
possible advance. If conditions are 
bearish, the driving of the biggest 
shorts to cover will practically end the 
rise; but in a genuine bull market the 
advance will continue until checked by- 
sales of stocks held for investment, 
which come upon the market only 
when prices are believed to be unduly 

In a sense, the market is always a 
contest between investors and specula- 
tors. The real investor, looking chiefly 
to interest return, but by no means un- 
willing to make a profit by buying low 
and selling high, is ready, perhaps, to 
buy his favorite stock at a price which 
will yield him six per cent, on his in- 
vestment, or to sell at a price yielding 
only four per cent. The speculator 
cares nothing about interest return. 
He wants to buy before prices go up 
and to sell short before they go down. 
He would as soon buy at the top of a 


big rise at any other time, provided prices 
are going still higher. 

As the market advances, therefore, 
one investor after another sees his limit 
reached and his stock sold. Thus the 
volume of stocks to be carried or tossed 
from hand to hand by bullish specula- 
tors is constantly rolling up like a 
snowball. On the ordinary intermedi- 
ate fluctuations, covering five to 
twenty dollars a share, these sales by 
investors are small compared with the 
speculative business. In one hundred 
shares of a stock selling at 150, the 
investor has $15,000; but with this sum 
the speculator can easily carry ten 
times that number of shares. 

The reason why sales by investors 
are so effective is not because of the 
actual amount of stock thrown on the 
market, but because this stock is a per- 
manent load, which will not be got 
rid of again until prices have suffered 
a severe decline. What the speculator 
sells he or some other trader may buy 
back tomorrow. 


The time comes when everybody 
seems to be buying. Prices become 
confused. One stock leaps upward in 
a way to strike terror to the heart of 
the last surviving short. Another ap- 
pears almost equally strong, but slips 
back unobtrusively when nobody is 
looking, like the frog jumping out of 
the well in the arithmetic of our boy- 
hood. Still another churns violently in 
one place, like a side-wheeler stuck on 
a sand-bar. 

Then the market gives a sudden 
lurch downward, as though in danger 
of spilling out its unwieldy contents. 
This is hailed as a "healthy reaction," 
though it is a mystery whom it can be 
healthy for, unless it is the shorts. 
Prices recover again, with everybody 
happy except a few disgruntled bears, 
who are rightly regarded with con- 
temptuous amusement. 

Curiously, how T ever, there seems to 
be stock enough for all comers, and 
the few cranks who have time to 
bother with such things notice that 


the general average of prices is now 
rising very slowly, if at all. The larg- 
est speculative holders of stocks, find- 
ing a market big enough to absorb 
their sales, are letting go. And there 
are always stocks enough to go around. 
Our big capitalists are seldom entirely 
out of stocks. They merely have more 
stocks when prices are low and fewer 
when prices are high. Moreover, long 
before there is any danger of the sup- 
ply running out, plenty of new issues 
are created. 

When there is a general public inter- 
est in the stock market, an immense 
amount of realizing will often be ab- 
sorbed within three or four days or a 
week, after which the deluge; but if 
speculation is narrow, prices may re- 
main around top figures for weeks or 
months, while big holdings are fed out, 
a few hundred shares here and a few 
hundred there, and even then a bal- 
ance may be left to be thrown over on 
the ensuing decline at whatever prices 
can be obtained. Great speculative 


leaders are far from infallible. They 
have often sold out too soon and later 
have seen the market run away to un- 
expected heights, or have held on too 
long and have suffered severe losses 
before they could get out. 

In this selling the bull leaders get a 
good deal of undesired help from the 
bears. However wary the bulls may 
be in concealing their sales, their machi- 
nations will be discovered by watch- 
ful professionals and shrewd chart stu- 
dents, and a considerable sprinkling of 
short sales will be put out within a 
few points of the top. This is one of 
the reasons why the long swings in 
active speculative stocks are smaller 
in proportion to price than in inactive 
specialties of a similar character — 
contrary to the generally received im- 
pression. It is rare that any consider- 
able short interest exists in the inactive 

Once the top-heavy load is over- 
turned, the decline is usually more 
rapid than the previous advance. The 


floating supply, now greatly increased, 
is tossed about from one speculator to 
another at lower and lower prices. 
From time to time stocks become tem- 
porarily lodged in stubborn hands, so 
that part of the shorts take fright and 
cover, causing a sharp upturn; but so 
long as the load of stocks is still on 
the market the general course of prices 
must be downward. 

Until investors or big speculative 
capitalists again come into the market, 
the load of stocks to be carried by or- 
dinary speculative bulls increases al- 
most continually. There is no lessen- 
ing of the floating supply of stock cer- 
tificates in the Street, and there is a 
gradual increase in the short interest; 
and of course the bulls have to carry 
these short sales as well as the actual 
certificates, since for every seller there 
must be a buyer, whether the sale be 
made by a short or a long. Shorts 
cover again and again on the sharp 
breaks, but in most cases they put out 
their lines again, either higher or lower, 


as opportunity offers. On the average, 
the short interest is largest at low 
prices, though there are likely to be 
periods during the decline when it will 
be larger than at the final bottom, 
where buying by shorts often helps to 
avert panicky conditions. 

The length of this decline, like the 
extent of the preceding advance, de- 
pends on fundamental conditions; for 
both investors and speculative capital- 
ists will come into the market sooner 
if all conditions are favorable than they 
will in a stringent money market or 
when the future prospects of business 
are unsatisfactory. As a rule, buyers 
do not appear in force until a "bargain 
day" appears. This is when, in its 
downward course, the heavy load of 
stocks strikes an area honeycombed 
with stop loss orders. Floor traders 
seize the opportunity to put out short 
lines and a general collapse results. 

Here are plenty of stocks to be had 
cheap, and shrewd operators — large 
and small, but mostly large or on the 


way to become so — are busy picking 
them up. The fixed limits of many in- 
vestors are also reached by the sharp 
break, and their purchases disappear, 
to be seen in the Street no more until 
the next bull turn. 

Many shorts cover on such a break, 
but not all. The sequel to the ''bar- 
gain day" is a big short interest which 
has overstayed its market, and a quick 
rally follows; but when the more 
urgent shorts get relief, prices sag 
again and fall into that condition of 
lethargy from which this consideration 
of the speculative cycle started. 

The movements described are sub- 
stantially uniform, whether the cycle 
be one covering a week, a month, or a 
year. The big cycle includes many 
intermediate movements, and these 
movements in turn contain smaller 
swings. Investors do not participate to 
any extent in the small swings, but other- 
wise the forces involved in a three-point 
turn up and down are substantially the 
same as those which appear in a thirty- 


point cycle, though not so easy to iden- 

The fact will at once be recognized 
that the above description is, in es- 
sence, a story of human hopes and 
fears ; of a mental attitude, on the part 
of those interested, resulting from their 
own position in the market, rather than 
from any deliberate judgment of con- 
ditions ; of an unwarranted projection 
by the public imagination of a perceived 
present into an unknown though not 
wholly unknowable future. 

Laying aside for the present the in- 
fluence of fundamental conditions on 
prices, it is our task to trace out both 
the causes and the effects of these 
psychological elements in speculation. 

II— Inverted Reasoning and its 

IT is hard for the average man to op- 
pose what appears to be the gen- 
eral drift of public opinion. In the 
stock market this is perhaps harder 
than elsewhere; for we all realize that 
the prices of stocks must, in the long 
run, be controlled by public opinion. 
The point we fail to remember is that 
public opinion in a speculative market 
is measured in dollars, not in popula- 
tion. One man controlling one million 
dollars has double the weight of five 
hundred men with one thousand dol- 
lars each. Dollars are the horse-power 
of the markets — the mere number of 
men does not signify. 

This is why the great body of opinion 
appears to be bullish at the top and 
bearish at the bottom. The multitude 
of small traders must be, as a plain 


necessity, long when prices are at the 
top, and short or out of the market at 
the bottom. The very fact that they 
are long at the top shows that they 
have been supplied with stocks from 
some source. 

Again, the man with one million dol- 
lars is a silent individual. The time 
when it was necessary for him to talk 
is past — his money now does the talk- 
ing. But the one thousand men who 
have one thousand dollars each are 
conversational, fluent, verbose to the 
last degree; and among these smaller 
traders are the writers — the newspaper 
and news bureau men, and the manu- 
facturers of gossip for brokerage 

It will be observed that the above 
course of reasoning leads us to the con- 
clusion that most of those who write 
and talk about the market are more 
likely to be wrong than right, at least 
so far as speculative fluctuations are 
concerned. This is not complimentary 
to the "moulders of public opinion/' 


but most seasoned newspaper readers 
will agree that it is true. The press 
reflects, in a general way, the thoughts 
of the multitude, and in the stock mar- 
ket the multitude is necessarily, as a 
logical deduction from the facts of the 
case, likely to be bullish at high prices 
and bearish at low. 

It has often been remarked that the 
average man is an optimist regarding 
his own enterprises and a pessimist re- 
garding those of others. Certainly this 
is true of the professional trader in 
stocks. As a result of the reasoning 
outlined above, he comes habitually to 
expect that nearly every one else will 
be wrong, but is, as a rule, confident 
that his own analysis of the situation 
will prove correct. He values the opin- 
ions of a few persons whom he be- 
lieves to be generally successful; but 
aside from these few, the greater the 
number of the bullish opinions he 
hears, the more doubtful he becomes 
about the wisdom of following the bull 


This apparent contrariness of the 
market, although easily understood 
when its causes are analyzed, breeds 
in professional traders a peculiar sort 
of skepticism — leads them always to 
distrust the obvious and to apply a 
kind of inverted reasoning to almost 
all stock market problems. Often, in 
the minds of traders who are not natu- 
rally logical, this inverted reasoning 
assumes the most erratic and gro- 
tesque forms, and it. accounts for many 
apparently absurd fluctuations in prices 
which are commonly charged to ma- 

For example, a trader starts with 
this assumption : The market has had 
a good advance; ail the small traders 
are bullish ; somebody must have sold 
them the stock which they are carry- 
ing; hence the big capitalists are prob- 
ably sold out or short and ready for a 
reaction or perhaps for a bear market. 
Then if a strong item of bullish news 
comes out — one, let us say, that really 
makes an important change in the 


situation— he says, "Ah, so this is what 
they have been bulling the market on ! 
It has been discounted by the previous 
rise." Or he may say, "They are put- 
ting out this bull news to sell stocks 
on." He proceeds to sell out any long 
stocks he may have or perhaps to sell 

His reasoning may be correct or it 
may not; but at any rate his selling 
and that of others who reason in a 
similar way, is likely to produce at 
least a temporary decline on the an- 
nouncement of the good news. This 
decline looks absurd to the outsider 
and he falls back on the old explana- 
tion, "All manipulation." 

The same principle is often carried 
further. You will .find professional 
traders reasoning that favorable fig- 
ures on the steel industry, for example, 
have been concocted to enable insiders 
to sell their Steel ; or that gloomy re- 
ports are put in circulation to facilitate 
accumulation. Hence they may act in 
direct opposition to the news and carry 


the market with them, for the time at 

The less the trader knows about the 
fundamentals of the financial situation 
the more likely he is to be led astray 
in conclusions of this character. If he 
has confidence in the general strength 
of conditions he may be ready to ac- 
cept as genuine and natural, a piece of 
news which he would otherwise receive 
with cynical skepticism and use as a 
basis for short sales* If he knows that 
fundamental conditions are unsound, 
he will not be so likely to interpret bad 
news as issued to assist in accumula- 
tion of stocks. 

The same reasoning is applied to 
large purchases through brokers kno,wn 
to be associated with capitalists. In fact, 
in this case we often hear a double in- 
version, as it were. Such buying may 
impress the observer in three ways : 

1. The "rank outsider" takes it at 
face value, as bullish. 

2. A more experienced trader may 
say, "If they really wished to get the 


stocks they would not buy through 
their own brokers, but would endeavor 
to conceal their buying by scattering 
it among other houses." 

3. A still more suspicious profes- 
sional may turn another mental somer- 
sault and say, 'They are buying 
through their own brokers so as to 
throw us off the scent and make us 
think someone else is using their bro- 
kers as a blind." By this double somer- 
sault such a trader arrives at the same 
conclusion as the outsider. 

The reasoning of traders becomes 
even more complicated when .large 
buying or selling is done openly by a 
big professional who is known to trade 
in and out for small profits. If he buys 
50,000 shares, other traders are quite 
willing to sell to him and their opinion 
of the market is little influenced, 
simply because they know he may sell 
50,000 the next day or even the next 
hour. For this reason great capitalists 
sometimes buy or sell through such big 
professional traders in order to execute 


their orders easily and without arous- 
ing suspicion. Hence the play of subtle 
intellects around big trading of this 
kind often becomes very elaborate. 

It is to be noticed that this inverted 
reasoning is useful chiefly at the top 
or bottom of a movement, when dis- 
tribution or accumulation is taking 
place on a large scale. A market which 
repeatedly refuses to respond to good 
news after a considerable advance is 
likely to be "full of stocks." Likewise 
a market which will not go down on 
bad news is usually "bare of stocks." 

Between the extremes will be found 
long stretches in which capitalists have 
very little cause to conceal their posi- 
tion. Having accumulated their lines 
as low as possible, they are then willing 
to be known as the leaders of the up- 
ward movement and have every reason 
to be perfectly open in their buying. 
This condition continues until they are 
ready to sell. Likewise, having sold as 
much as they desire, they have no 
reason to conceal their position further, 


even though a subsequent decline may 
run for months or a year. 

It is during a long upward move- 
ment that the "lamb" makes money, 
because he accepts facts as facts, while 
the professional trader is often found 
fighting the advance and losing heavily 
because of his over-development of 
cynicism and suspicion. 

The successful trader eventually 
learns when to invert his natural men- 
tal processes and when to leave them 
in their usual position. Often he 
develops a sort of instinct which could 
scarcely be reduced to cold print. But 
in the hands of the tyro this form of 
reasoning is exceedingly dangerous, be- 
cause it permits of putting an alternate 
construction on any event. Bull news 
either (1) is significant of a rising 
trend of prices, or (2) indicates that 
"they" are trying to make a market 
to sell on. Bad news may indicate 
either a genuinely bearish situation or 
a desire to accumulate stocks at low 


The inexperienced operator is there- 
fore left very much at sea. He is play- 
ing with the professional's edged tools 
and is likely to cut himself. Of what 
use is it for him to try to apply his 
reason to stock market conditions when 
every event may he doubly interpreted? 

Indeed, it is doubtful if the profes- 
sional's distrust of the obvious is of 
much benefit to him in the long run. 
Most of us have met those deplorable 
mental wrecks, often found among the 
"chairwarmers" in brokers' offices, 
whose thinking machinery seems to 
have become permanently demoralized 
as a result of continued acrobatics. 
They are always seeking an "ulterior 
motive" in everything. They credit — 
or debit — Morgan and Rockefeller with 
the smallest and meanest trickery and 
ascribe to them the most artful duplici- 
ty in matters which those "high finan- 
ciers" wouldn't stoop to notice. The 
continual reversal of the mental engine 
sometimes deranges its mechanism. 

Probably no better general rule can 


be laid down than the brief one, "Stick 
to common sense." Maintain a bal- 
anced, receptive mind and avoid ab- 
struse deductions. A few further sug- 
gestions may, however, be offered : 

If you already have a position in 
the market, do not attempt to bolster 
up your failing faith by resorting to 
intellectual subtleties in the interpre- 
tation of obvious facts. If you are 
long or short of the market, you are 
not an unprejudiced judge, and you will 
be greatly tempted to put such an in- 
terpretation upon current events as will 
coincide with your preconceived opin- 
ion. It is hardly too much to say that 
this is the greatest obstacle to success. 
The least you can do is to avoid in- 
verted reasoning in support of your 
own position. 

After a prolonged advance, do not 
call inverted reasoning to your aid in 
order to prove that prices are going 
still higher; likewise after a big break 
do not let your bearish deductions be- 
come too complicated. Be suspicious 


of bull news at high prices, and of bear 
news at low prices. 

Bear in mind that an item of news 
usually causes but one considerable 
movement of prices. If the movement 
takes place before the news comes out, 
as a result of rumors and expectations, 
then it is not likely to be repeated after 
the announcement is made; but if the 
movement of prices has not preceded, 
then the news contributes to the gen- 
eral strength or weakness of the situ- 
ation and a movement of prices may 

Ill— "They" 

IF a man entirely unfamiliar with the 
stock market should spend several 
days around the Exchange listen- 
ing to the conversation of all sorts of 
traders and investors, in order to pick 
up information about the causes of price 
movements, the probability is that the 
most pressing question in his mind at the 
end of that time would be "Who are 

Everywhere he went he would 
hear about Them. In the customers' 
rooms of the fractional lot houses 
he would find young men trading in 
ten shares and arguing learnedly as 
to what They were to do next. Tape 
readers — experts and tyros alike — 
would tell him that They were accumu- 
lating Steel, or distributing Reading. 
Floor traders and members of the Ex- 
change would whisper that they were 


told They were going to put the market 
up, or down, as the case might be. Even 
sedate investors might inform him that, 
although the situation was bearish, un- 
doubtedly They would have to put the 
market temporarily higher in order to 
unload Their stocks. 

This "They" theory of the market is 
quite as prevalent among successful 
traders as among beginners — probably 
more so. There may be room for argu- 
ment as to why this is so, but as to the 
fact itself there is no doubt. Whether 
They are a myth or a definite reality, 
many persons are making money by 
studying the market from this point of 

If you were to go around Wall street 
and ask various classes of traders who 
They are, you would get nearly as many 
different answers as the number of peo- 
ple interviewed. One would say, "The 
house of Morgan" ; another, "Standard 
Oil and associated interests" — which is 
pretty broad, when you stop to think of 
it ; another, "The big banking interests" ; 


still another, "Professional traders on the 
floor" ; a fifth, 'Tools in the various fa- 
vorite stocks, which act more or less in 
concert" ; a sixth might say, "Shrewd and 
successful speculators, whoever and 
wherever they are" ; w r hile to the seventh, 
They may typify merely active traders 
as a whole, whom he conceives to make 
prices by falling over each other to buy 
or to sell. 

Indeed, one writer of no small attain- 
ments as a student of market conditions 
believes that the entire phenomena of the 
New York stock market are under the 
control of some one individual, who is 
presumably, in some way or other, the 
representative of great associated inter- 

It seems obviously impossible to trace 
to its source, tag and identify any sort 
of permanent controlling power. The 
stock markets of the world move pretty 
much together in the broad cyclical 
swings, so that such a power would have 
to consist of a world-w T ide association of 
great financial interests, controlling all of 


the principal security markets. The av- 
erage observer will find it difficult to 
masticate and swallow this proposition. 

The effort to reduce the science of 
speculation and investment to an impos- 
sible definiteness or an ideal simplicity 
is, I believe, responsible for many fail- 
ures. A. S. Hardy, the diplomat, who was 
formerly a professor of mathematics and 
wrote books on quaternions, differential 
calculus, etc., once remarked that the 
study of mathematics is very poor mental 
discipline, because it does not cultivate 
the judgment. Given fixed and certain 
premises, your mathematician will follow 
them out to a correct conclusion; but in 
practical affairs the whole difficulty lies 
in selecting your premises. 

So the market student of a mathemat- 
ical turn of mind is always seeking a 
rule or a set of rules — a "sure thing" as 
traders put it. He would not seek such 
rules for succeeding in the grocery busi- 
ness or the lumber business; he would, 
on the contrary, analyze each situation as 
it arose and act accordingly. The stock 


market presents itself to my mind as a 
purely practical proposition. Scientific 
methods may be applied to any line of 
business, from stocks to chickens, but 
this is a very different thing from trying 
to reduce the fluctuations of the stock 
market to a basis of mathematical cer- 

In discussing the identity of Them, 
therefore, we must be content to take 
obvious facts as we find them without 
attempting to spin fine theories. 

There are three senses in which this 
idea of "Them" has some foundation in 
fact. First, "They" may be and often 
are roughly conceived of as the floor 
traders on the Stock Exchange who are 
directly concerned in making quotations, 
pools formed to control certain stocks, or 
individual manipulators. 

Floor traders exercise an important in- 
fluence on the immediate movement of 
prices. Suppose, for example, they ob- 
serve that offerings of Reading are very 
light. Declines do not induce liquidation 
and only small offerings of stock are met 


on advances. They begin to feel that, in 
the absence of unexpected cataclysms, 
Reading will not decline much. The nat- 
ural thing for them to do is to begin buy- 
ing Reading on all soft spots. Whenever 
a few hundred shares are offered at a 
bargain, floor traders snap up the stock. 
As a result of this "bailing out" of the 
market, Reading becomes scarcer still, 
and traders, being now long, become 
more bullish. They begin to "mark up 
prices." This is not difficult, since they 
are, for the time being, practically unani- 
mous in a desire for higher prices. Sup- 
pose the market is 161 Vs bid, offered at 
16154- They find that only 100 shares 
are for sale at *4> an d 200 are offered 
at 3/£. As to how much stock may be 
awaiting bids at y 2 or higher, they can- 
not be sure, but can generally make a 
shrewd guess. One or more traders take 
these offerings, of perhaps 500 shares, 
and make the market y 2 bid. The other 
floor traders are not willing to sell at 
this trifling profit, and a wait ensues to 
see whether any outside orders are at- 


traded by the moyement of the price, 
and if so, whether they are buying or 
selling orders. If a few buying orders 
come in, they are filled, perhaps at ^ 
and %. If selling appears, the floor 
traders retire in good order, take the 
offerings at lower prices, and try it again 
the next day or perhaps the next hour. 
Eventually, by seizing every favorable 
opportunity, they engineer an upward 
move of perhaps two or three points 
without taking any more stock than they 

If such a movement attracts a follow- 
ing, it may easily run ten points without 
any real change in the prospects of the 
Reading road — though the prospects of 
the road may have had something to do 
with making the stock scarce before the 
movement started. On the other hand, 
if large offerings of stock are en- 
countered at the advance, the boomlet is 
ignominiously squelched and the floor 
traders make trifling profits or losses. 

Pools are not so common as most out- 
siders believe. There are many difficul- 


ties and complications to be overcome be- 
fore a pool can be formed, held together, 
and operated successfully, as we had am- 
ple opportunity to observe not long ago 
in the case of Hocking Coal & Iron. 
But if a definite pool exists in any stock, 
its operations are practically a reproduc- 
tion, on a larger scale and under a bind- 
ing agreement, of the methods employed 
by floor traders over a smaller range and 
in a mere loose and voluntary associa- 
tion resulting from their common inter- 
ests. And the individual manipulator is 
only a pool consisting of one person. 

Second, many conceive "Them" as an as- 
sociation of powerful capitalists who are 
running a campaign in all the important 
speculative stocks simultaneously. It is 
safe to say that no such permanent and 
united association exists, though it would 
be hard to prove such a statement. But 
there have been many times when a sin- 
gle great interest was practically in con- 
trol of the market for a time, other in- 
terests being content to look on, or to 


participate in a small way, or to await a 
favorable chance to take the other side. 

The "Standard Oil crowd/' the "Gates 
crowd/' the "Morgan interests," and 
Harriman and his associates, will at 
once occur to the reader as having been, 
at various times in the past, in sole con- 
trol of an important general campaign. 
At present the great interests are gen- 
erally classified into three divisions — 
Morgan, Standard Oil, and Kuhn-Loeb. 

A definite agreement among such in- 
terests as these would be impossible, ex- 
cept for limited and temporary purposes. 
This is perhaps not so much because 
these high financiers couldn't trust each 
other, as it is because each so-called in- 
terest consists of a loosely bound aggre- 
gation of followers of all sorts and va- 
rieties, having only one thing in com- 
mon — control of capital. Such an "in- 
terest" is not an army, where the traitor 
can be court-martialed and shot; it is 
a mob, and has to be led, not driven. 
True, the known traitor might be put to 
death, financially speaking, but in stock 


market operations the traitor cannot, as 
a rule, be known. Unless his operations 
are of unusual size, he can successfully 
cover his tracks. 

From this second point of view, 
"They" are not always active in the mar- 
ket. Great campaigns can only be un- 
dertaken with safety in periods when the 
future is to a certain extent assured. When 
the future is in doubt, when various 
confusing elements enter into the finan- 
cial and political situation, leading finan- 
ciers may be quite content to confine 
their stock market operations to indi- 
vidual deals, and to postpone the inaugu- 
ration of a broad campaign until a more 
solid foundation exists for it. 

Third, "They" may be conceived sim- 
ply as speculators and investors in 
general — all that miscellaneous and 
heterogeneous troop of persons, scat- 
tered over the whole world, each of 
whom contributes his mite to the fluctua- 
tions of prices on the Stock Exchange. 
In this sense there is no doubt about the 
existence of Them, and They are the 


court of last resort in the establishment 
of prices. To put it another way, these 
are the "They" who are the ultimate con- 
sumers of securities. It is to Them that 
everybody else is planning, sooner or 
later, directly or indirectly, to sell his 

You can lead the horse to water, but 
you can't make him drink. You or I or 
any other great millionaire can put up 
prices, but you can't make Them buy the 
stocks from you, unless They have the 
purchasing power and the purchasing 
disposition. So there is no doubt that 
here, at any rate, we have a conception 
of Them which will stand analysis with- 
out exploding. 

In cases where a general campaign is 
being conducted, the "They" theory of 
values is of considerable help in the ac- 
cumulation or distribution of stocks. In 
fact, in the late stages of a bull campaign 
the argument most frequently heard is 
likely to be something as follows : "Yes, 
prices are high and I can't see that fu- 
ture prospects are especially bullish — 


but stocks are in strong hands and They 
will have to put them higher to make 
a market to sell on." Some investors 
make a point of dumping over all their 
stocks as soon as this veteran war-horse 
of the news brigade is groomed and trot- 
ted out. Likewise, after a prolonged 
bear campaign, we hear that somebody 
is "in trouble" and that They are going 
to break the market until certain con- 
centrated holdings are brought out. 

All this is very likely to be nothing 
but dust thrown in the eyes of that most 
gullible of all created beings — the hap- 
hazard speculator. When prices are so 
high in comparison with conditions that 
no sound reason can be advanced why 
they should go higher, a certain number 
of people are still induced to buy be- 
cause of what They are going to do. Or, 
at least, if the public can no longer be 
induced to buy in any large volume, it is 
prevented from selling short for fear of 
what They may do. 

The close student of the technical con- 
dition of the market — by which is meant 


the character of the long and short inter- 
ests from day to day — is pretty sure to 
base his operations to a considerable ex- 
tent on what he thinks They will do 
next. He has in mind Them as de- 
scribed in the first classification above — 
floor traders, pools and manipulators. 
He gets a good deal of help from this 
conception, crude as it may appear to 
be — largely, no doubt, because it serves 
to distract his mind from current news 
and gossip, and to prevent him from 
being too greatly influenced by the mo- 
mentary appearance of the market. 

When the market looks weakest, when 
the news is at the worst, when bearish 
prognostications are most general, is the 
time to buy, as every schoolboy knows; 
but if a man has in mind a picture of a 
flood of stocks pouring out from the four 
quarters of the globe, with no buyers, 
because of some desperately bad news 
which is just coming over the ticker, it 
is almost a mental impossibility for him 
to get up the courage to plunge in and 
buy. If, on the other hand, he conceives 


that They are just giving the market a 
final smash to facilitate covering a gi- 
gantic line of short stocks, he has cour- 
age to buy. His view may be right or 
wrong, but at least he avoids buying at 
the top and selling at the bottom, and he 
has nerve to buy a weak market and sell 
a strong one. 

The reason for the haziness of the 
"They" conception in the average trad- 
er's mind is that he is only concerned 
with Them as They manifest Themselves 
through the stock market. As to who 
They are he feels a mild and detached 
curiosity ; but as to Their manifestations 
in the market he is vitally and financially 
interested. It is on the latter point, 
therefore, that he concentrates his 

But inasmuch as definite, painstaking 
analysis of a situation is always better 
than a hazy general notion of it, the 
trader or investor would do much better 
to rid his mind of Them. The word 
"They" means nothing until it has an 
antecedent; and to use it continually 


without having any antecedent in mind 
is slipshod language, which stands for 
slipshod thinking. They, in the sense 
of the big banking interests, may be 
working directly against Them in the 
sense of individual manipulators; the 
manipulator, again, may be trying to trap 
Them in the sense of floor traders. 

A genuine knowledge of the technical 
condition of the market cannot be 
summed up in any offhand declaration 
about what They are going to do. You 
cannot determine the attitude toward the 
market of every individual who is inter- 
ested in it, but you can roughly classify 
the sources from which buying and sell- 
ing are likely to come, the motives w r hich 
are likely to actuate the various classes, 
and the character of the long interest and 
short interest. In brief, after enough 
study and observation, you can always 
have in mind some kind of an antecedent 
for Them, and must have it, if you base 
your operations on technical conditions. 

IV — Confusing the Present with 
the Future — Discounting 

IT is axiomatic that inexperienced 
traders and investors, and indeed a 
majority of the more experienced as 
well, are continually trying to speculate 
on past events. Suppose, for example, 
railroad earnings as published are show- 
ing constant large increases in net. The 
novice reasons, "Increased earnings mean 
increased amounts applicable to the pay- 
ment of dividends. Prices should rise. 
I will buy." 

Not at all. He should say, "Prices 
have risen to the extent represented by 
these increased earnings, unless this ef- 
fect has been counterbalanced by other 
considerations. Now what next?" 

It is a sort of automatic assumption of 
the human mind that present conditions 
will continue, and our whole scheme of 
life is necessarily based to a great degree 


on this assumption. When the price of 
wheat is high farmers increase their 
acreage because wheat-growing pays 
better; when it is low they plant less. 
I remember talking with a potato-raiser 
who claimed that he had made a good 
deal of money by simply reversing the 
above custom. When potatoes were low 
he had planted liberally; when high he 
had cut down his acreage — because he 
reasoned that other farmers would do 
just the opposite. 

The average man is not blessed — or 
cursed, however you may look at it — 
with an analytical mind. We see "as 
through a glass darkly." Our ideas are 
always enveloped in a haze and our 
reasoning powers work in a rut from 
which we find it' painful if not impossible 
to escape. Many of our emotions and 
some of our acts are merely automatic 
responses to external stimuli. Wonder- 
ful as is the development of the human 
brain, it originated as an enlarged gan- 
glion, and its first response is still prac- 
tically that of the ganglion. 


A simple illustration of this is found 
in the enmity we all feel toward the alarm 
clock which arouses us in the morning. 
We have carefully set and wound that 
alarm and if it failed to go off it would 
perhaps put us to serious inconvenience; 
yet we reward the faithful clock with 

When a subway train is delayed nine- 
tenths of the people waiting on the plat- 
forms are anxiously craning their necks 
to see if it is coming, while many persons 
on it who are in danger of missing an 
engagement are holding themselves tense, 
apparently in the effort to help the train 
along. As a rule we apply more well- 
meant, but to a great extent ineffective, 
energy, physical or nervous, to the ac- 
complishment of an object, than analysis 
or calculation. 

When it comes to so complicated a 
matter as the price of stocks, our hazi- 
ness increases in proportion to the dif- 
ficulty of the subject and our ignorance 
of it. From reading, observation and 
conversation we imbibe a miscellaneous 


assortment of ideas from which we con- 
clude that the situation is bullish or 
bearish. The very form of the expres- 
sion "the situation is bullish" — not "the 
situation will soon become bullish" — 
shows the extent to which we allow the 
present to obscure the future in the 
formation of our judgment. 

Catch any trader and pin him down to 
it and he will readily admit that the 
logical moment for the highest prices is 
when the news is most bullish; yet you 
will find him buying stocks on this news 
after it comes out — if not at the moment, 
at any rate "on a reaction." 

Most coming events cast their shadows 
before, and it is on this that intelligent 
speculation must be based. The move- 
ment of prices in anticipation of such 
an event is called "discounting," and this 
process of discounting is worthy a little 
careful examination. 

The first point to be borne in mind is 
that some events cannot be discounted, 
even by the supposed omniscience of the 
great banking interests — which is in 


point of fact, more than half imaginary. 
The San Francisco earthquake is the 
standard example of an event which 
could not be foreseen and therefore 
could not be discounted; but an event 
does not have to be purely an "act of 
God" to be undiscountable. There can 
be no question that our great bankers 
have been as much in the dark in regard 
to some recent Supreme Court decisions 
as the smallest "piker" in the customers' 
room of an odd-lot brokerage house. 

If the effect of an event does not make 
itself felt before the event takes place, it 
must come after. In all discussion of 
discounting we must bear this fact in 
mind in order that our subject may not 
run away with us. 

On the other hand an event may some- 
times be overdiscounted. If the div- 
idend rate on a stock is to be raised from 
four to five per cent., earnest bulls, with 
an eye to their own commitments, may 
spread rumors of six or seven per cent., 
so that the actual declaration of five per 


cent, may be received as disappointing 
and cause a decline. 

Generally speaking, every event which 
is under the control of capitalists as- 
sociated with the property, or any fi- 
nancial condition which is subject to the 
management of combined banking in- 
terests, is likely to be pretty thoroughly 
discounted before it occurs. There is 
never any lack of capital to take ad- 
vantage of a sure thing, even though it 
may be known in advance to only a few 

The extent to which future business 
conditions are known to "insiders" is, 
however, usually overestimated. So 
much depends, especially in America, 
upon the size of the crops, the temper of 
the people, and the policies adopted by 
leading politicians, that the future of 
business becomes a very complicated 
problem. No power can drive the Ameri- 
can people. Any control over their ac- 
tion has to be exercised by cajolery or 
by devious and circuitous methods. 

Moreover, public opinion is becoming 


more volatile and changeable year by 
year, owing to the quicker spread of in- 
formation and the rapid multiplication of 
the reading public. One can easily 
imagine that some of our older financiers 
must be saying to themselves, "If I had 
only had my present capital in 1870, or 
else had the conditions of 1870 to work 
on today !" 

A fair idea of when the discounting 
process will be completed may usually be 
formed by studying conditions from 
every angle. The great question is, 
when will the buying or selling become 
most general and urgent? In 1907, for 
example, the safest and best time to buy 
the sound dividend-paying stocks was 
on the Monday following the bank state- 
ment which showed the greatest decrease 
in reserves. The markets opened down 
several points under pressure of liquida- 
tion, and standard issues never sold so 
low afterward. The simple explanation 
was that conditions had become so bad 
that they could not get any worse with- 


out utter ruin, which all parties must and 
did unite to prevent. 

Likewise in the Presidential campaign 
of 1900, the lowest prices were made on 
Bryan's nomination. Everyone said at 
once, "He can't be elected." Therefore 
his nomination was the worst that could 
happen — the point of time where the 
political news became most intensely 
bearish. As the campaign developed his 
defeat became more and more certain, 
and prices continued to rise in accordance 
with the general economic and financial 
conditions of the period. 

It is not the discounting of an event 
thus known in advance to capitalists, that 
presents the greatest difficulties, but 
cases where considerable uncertainty 
exists, so that even the clearest mind and 
the most accurate information can result 
only in a balancing of probabilities, with 
the scale perhaps inclined to a greater or 
less degree in one direction or the other. 

In some cases the uncertainty which 
precedes such an event is more depress- 
ing than the worst that can happen 


afterward. An example is a Supreme 
Court decision upon a previously un- 
determined public policy which has kept 
business men so much in the dark that 
they feared to go ahead with any im- 
portant plans. This was the case at the 
time of the Northern Securities decision 
in 1904. "Big business" could easily 
enough adjust itself to either result. It 
was the uncertainty that was bearish. 
Hence the decision was practically dis- 
counted in advance, no matter what it 
might prove to be. 

This was not true to the same extent 
of the Standard Oil and American To- 
bacco decisions of 1911, because those 
decisions were an earnest of more 
trouble to come. The decisions were 
greeted by a temporary spurt of activity, 
based on the theory that the removal of 
uncertainty was the important thing ; but 
a sensational decline started soon after 
and was not checked until the announce- 
ment that the Government would pros- 
ecute the United States Steel Corpora- 
tion. This was deemed the worst that 


could happen for some time to come, and 
was followed by a considerable advance. 

More commonly, when an event is un- 
certain the market estimates the chances 
with considerable nicety. Each trader 
backs his own opinion, strongly if he 
feels confident, moderately if he still has 
a few doubts which he cannot down. 
The result of these opposing views may 
be stationary prices, or a market fluctuat- 
ing nervously within a narrow range, or 
a movement in either direction, greater 
or smaller in proportion to the more or 
less emphatic preponderance of the buy- 
ing or selling. 

Of course it must always be remem- 
bered that it is the dollars that count, 
not the number of buyers or sellers. A 
few great capitalists having advance in- 
formation which they regard as accurate, 
may more than counterbalance thousands 
of small traders who hold an opposite 
opinion. In fact, this is a condition very 
frequently seen, as explained in a pre- 
vious chapter. 

Even the operations of an individual 


investor visually have an effect on prices 
pretty accurately adjusted to his opin- 
ions. When he believes prices are low 
and everything favors an upward move- 
ment, he will strain his resources in 
order to accumulate as heavy a load of 
securities as he can carry. After a fair 
advance, if he sees the development of 
some factor which might cause a decline 
— though he doesn't really believe it will 
— he thinks it wise to lighten his load 
somewhat and make sure of some of his 
accumulated profits. Later when he 
feels that prices are "high enough/' he 
is a liberal seller; and if some danger 
appears while the level of quoted values 
continues high, he "cleans house/' to be 
ready for whatever may come. Then if 
what he considers an unwarranted specu- 
lation carries prices still higher, he is 
very likely to sell a few hundred shares 
short by way of occupying his capital 
and his mind. 

It is, however, the variation of opinion 
among different men that has the largest 
influence in making the market responsive 


to changing conditions. A development 
which causes one trader to lighten his 
line of stocks may be regarded as harm- 
less or even beneficial by another, so that 
he maintains his position or perhaps buys 
more. Out of a world-wide mixture of 
varying ideas, personalities and informa- 
tion emerges the average level of 
prices — the true index number of in- 
vestment conditions. 

The necessary result of the above line 
of reasoning is that not only probabili- 
ties but even rather remote possibilities 
are reflected in the market. Hardly any 
event can happen of sufficient importance 
to attract general attention which some 
process of reasoning cannot construe as 
bullish and some other process interpret 
as bearish. Doubtless even our old friend 
of the news columns to the effect that 
"the necessary activities of a nation of 
ninety million souls create and maintain 
a large volume of business," may in- 
fluence some red-blooded optimist to buy 
100 Union ; but the grouchy pessimist who 
has eaten too many doughnuts for break- 


fast will accept the statement as an evi- 
dence of the scarcity of real bull news 
and will likely enough sell 100 Union 
short on the strength of it. 

It is the overextended speculator who 
causes most of the fluctuations that look 
absurd to the sober observer. It does not 
take much to make a man buy when he 
is short of stocks "up to his neck." A 
bit of news which he would regard as in- 
significant at any other time will then 
assume an exaggerated importance in his 
eyes. His fears increase in geometrical 
proportion to the size of his line of 
stocks. Likewise the overloaded bull 
may begin to "throw his stocks" on some 
absurd story of a war between Honduras 
and Roumania, without even stopping to 
look up the geographical location of the 
countries involved. 

Fluctuations based on absurdities are 
always relatively small. They are due 
to an exaggerated fear of what "the 
other fellow" mav do. Personallv, vou 
do not fear a war between Honduras and 
Roumania; but may not the rumor be 


seized upon by the bears as an excuse 
for a raid? And you have too many 
stocks to be comfortable if such a break 
should occur. Moreover, even if the 
bears do not raid the market, will there 
not be a considerable number of persons 
who, like yourself, will fear such a raid, 
and will therefore lighten their load of 
stocks, thus causing some decline? 

The professional trader, following this 
line of reasoning to the limit, eventually 
comes to base all his operations for short 
turns in the market not on the facts but 
on what he believes the facts will cause 
others to do — or more accurately, per- 
haps, on what he sees that the news is 
causing others to do; for such a trader 
is likely to keep his finger constantly on 
the pulse of buying and selling as it 
throbs on the floor of the Exchange or 
as recorded on the tape. 

The non-professional, however, will 
do well not to let his mind stray too far 
into the unknown territory of what others 
may do. Like the "They" theory of 
values, it is dangerous ground in that it 


leads toward the abdication of common 
sense ; and after all, others may not prove 
to be such fools as we think they are. 
While the market is likely to discount 
even a possibility, the chances are very 
much against our being able to discount 
the possibility profitably. 

In this matter of discounting, as in 
connection with most other stock market 
phenomena, the most useful hint that can 
be given is to avoid all efforts to reduce 
the movement of prices to rules, measures, 
or similarities and to analyze each case 
by itself. Historical parallels are likely 
to be misleading. Every situation is new, 
though usually composed of familiar 
elements. Each element must be weighed 
by itself and the probable result of the 
combination estimated. In most cases 
the problem is by no means impossible, 
but the student must learn to look into 
the future and to consider the present 
only as a guide to the future. Extreme 
prices will come at the time when the 
news is most emphatic and most widely 
disseminated. When that point is passed 


the question must always be, "What 

V — Confusing the Personal with 
the General 

IN a previous chapter the fact has 
been mentioned that one of the 
greatest difficulties encountered by 
the active trader is that of keeping his 
mind in a balanced and unprejudiced 
condition when he is heavily com- 
mitted to either the long or short side 
of the market. Unconsciously to him- 
self, he permits his judgment to be 
swayed by his hopes. 

A former large speculator on the 
Chicago Board of Trade, after being 
short of the market and very bearish 
on wheat for a long time, one day sur- 
prised all his friends by covering 
everything, going long a moderate 
amount, and arguing violently on the 
bull side. For two days he maintained 
this position, but the market failed to 
go up. He then turned back to the 
short side, and had even more bear 


arguments at his tongue's end than be- 

To a certain extent he did this to 
test the market, but still more to test 
himself — to see whether, by changing 
front and taking the other side, he 
could persuade himself out of his bear- 
ish opinions. When even this failed 
to make any real change in his views, 
he was reassured and was ready for 
a new and more aggressive campaign 
on the short side. 

There is nothing peculiar about this 
condition. While it is especially diffi- 
cult to maintain a balanced mind in 
regard to commitments in the markets, 
it is not easy to do so about anything 
that closely touches our personal in- 
terests. As a rule we can find plenty 
of reasons for doing what we very 
much want to do, and we are still more 
prolific with excuses for not doing 
what we don't want to do. Most of 
us change the old sophism "Whatever 
is, is right" to the more directly use- 
ful form "Whatever I want is right." 
To many readers will occur at once the 


name of a man prominent in public 
life who seems very frequently to act 
on this motto. 

If Smith and Jones have a verbal 
agreement, which afterwards turns out 
to be greatly to Jones' advantage, 
Smith's recollection is that it was 
merely a loose understanding which 
could be cancelled at any time, while 
Jones remembers it to have been a 
definite legal contract, perfectly en- 
forceable if it had only been written. 
Talleyrand said that language was 
given us for the purpose of concealing 
thought. Likewise many seem to 
think that logic was given us for the 
purpose of backing up our desires. 

Few persons are so introspective as 
to be able to tell where this bias in 
favor of their own interests begins and 
where it leaves off. Still fewer bother 
to make the effort to tell. To a great 
extent we train our judgment to lend 
itself to our selfish interests. The 
question with us is not so much 
whether we have the facts of a situa- 


tion correctly in mind, as whether we 
can "put it over." 

When it comes to buying and selling 
stocks, there is no such thing as 
"putting it over." The market is re- 
lentless. It cannot be budged by our 
sophistries. It will respond exactly to 
the forces and personalities which are 
working upon it, with no more regard 
for our opinions than if we couldn't 
vote. We cannot work for our own 
interests as in other lines of business— 
we can only fit our interests to the 

To make the greatest success it is 
necessary for the trader to forget en- 
tirely his own position in the market, 
his profits or losses, the relation of 
present prices to the point where he 
bought or sold, and to fix his thoughts 
upon the position of the market. If 
the market is going down the trader 
must sell, no matter whether he has a 
profit or a loss, whether he bought a 
year ago or two minutes ago. 

How far the average trader is from 
attaining this point of view is quickly 


seen from his conversation, and it is 
also true that a great deal of the litera- 
ture of speculation absolutely fails to 
reach this conception. 

"You have five points profit — you 
had better take it," advises the broker. 
Perhaps so, if you know nothing about 
the market ; but if you understand the 
market the time to take your profit is 
when the upward movement shows 
signs of culminating, regardless of 
your own deal. 

"Stop your losses; let your profits 
run" is a saying which appeals to the 
novice as the essence of wisdom. But 
the whole question is where to stop the 
losses and how far to let the profits 
run. In other words, what is the mar- 
ket going to do? If you can tell this 
your personal losses and profits will 
take care of themselves. 

Here is a man who has done a great 
deal of figuring and has proved to his 
own satisfaction that seven points is 
the correct profit to take in Union 
Pacific, while losses should be limited 
to two and one-half points. Nothing 


could be more foolish than these ar- 
bitrary figures. He is trying to make 
the market fit itself around his own 
trades, instead of adapting his trades 
to the market. 

In any broker's office you will notice 
that a large part of the talk concerns 
the profits and losses of the traders. 
Brown had a profit of ten points and 
then let it get away from him. "Great 
Scott !" says his wise friend. "What 
do you want? Aren't you satisfied with 
ten points profit?" The reply should 
be, though it rarely is, "Certainly not, 
if I think the market is going higher." 

"Get them out with a small profit," 
I once heard one broker say to an- 
other. "If you don't they will hang 
on and take a loss. They never get 
profit enough to satisfy them." A 
good policy, probably, if neither the 
broker nor his customer had any real 
knowledge of the market; but mere 
nonsense for the trader who aims to 
be in the slightest degree scientific. 

The fact is that the more a trader 
allows his mind to dwell upon his own 


position in the market the more likely 
it is that his judgment will become 
warped so that his mind is blind to 
those considerations which do not fall 
in with his preconceived opinion. 

Until you try it, you have almost no 
idea of the extent to which you may 
be rendered unreasonable by the mere 
fact that you are committed to one 
side of the market. "In the market, 
to be consistent is to be stubborn/' 
some one has said; and it is true that 
the man of strong will and logical in- 
tellect is often less successful than the 
more shallow and volatile observer, 
who is ready to whiffle about like the 
weathercock at any suspicion of a 
change in the wind. This is because 
the strong man has in this instance 
embarked upon an enterprise where 
he cannot use his natural force and de- 
termination — he can employ only his 
faculties of observation and interpreta- 
tion. Yet in the end the man of char- 
acter will be the more permanently 
successful, because he will eventually 


master his subject more thoroughly 
and attain a more judicial attitude. 

The more simple-minded, after once 
committing themselves to a position, 
are thereafter chiefly influenced and 
supported by the illusions of hope. 
They bought, probably, as a result of 
some bullish development. If prices 
have advanced, they find that the mar- 
ket "looks strong," a good deal of en- 
couraging news comes out on the 
tickers, and they hope for large profits. 
After five points in their favor, they 
hope for ten, and after ten they look 
for fifteen or twenty. 

On the other hand, if prices decline 
they charge it to "manipulation," "bear 
raids," etc., and expect an early re- 
covery. Much of the bear news ap- 
pears to them to be put out malicious- 
ly, in order to cause prices to decline 
further. It is not until the decline 
begins to cause a painful encroach- 
ment upon their capital that they 
reach the point of saying, "If 
'they' can depress prices like this 
in the face of a bullish situation, 


what is the use of fighting them? By 
a flood of short sales, they can put 
prices down as much as they like" — 
or something of the sort. 

Such traders are suffering merely 
from youth, or lack of sound business 
sense, or both. They have a consider- 
able period of study before them, if 
they persist until they get permanently 
profitable results. Most of them, of 
course, do not persist. 

A much more intelligent class, many 
of whom are properly to be considered 
as investors, do not allow their posi- 
tion in the market to blind them so far 
as current news or statistical develop- 
ments are concerned, but do permit 
themselves to become biased in regard 
to the most important factor of all — 
the effect of a change in the price level. 

They bought stocks in the expecta- 
tion of an improved situation. The 
improved situation comes and prices 
rise. Nothing serious in the way of 
bear news appears. On the con- 
trary, bull news continues plentiful. 


Under these conditions they see no 
reason for selling. 

Yet there may be a most important 
reason for selling — namely, that prices 
have risen sufficiently to counterbal- 
ance the improved situation — and they 
would see and appreciate this fact if 
they were in the position of an unin- 
terested observer. 

One of the principal reasons why in- 
vestors of this class allow themselves 
to become confused as to the influence 
of the price level is because a bull 
market nearly always goes unreason- 
ably high before it culminates. The 
investor has perhaps, in several previ- 
ous instances, sold out at what he 
thought was a fair price level, only to 
see the public run away with the mar- 
ket to a point where his profits would 
have been doubled if he had held on. 

It is in such cases that an expert 
knowledge of speculation is essential. 
If the investor has not this knowledge, 
and cannot obtain the dependable ad- 
vice of one who has it, then he must 
content himself with more moderate 


profits and forego the expectation of 
getting the full benefit of the advance. 
But with a fair knowledge of specula- 
tive influences, he can fix his mind on 
the development of the campaign, re- 
gardless of his own holdings, and can 
usually secure a larger profit than if 
he depended merely upon ordinary 
business "common sense." 

The mistake is made when, with- 
out any expert knowledge of specula- 
tion, he permits himself to hold on in 
the hope of higher prices after a level 
has been reached which has fairly dis- 
counted improved business conditions. 

Not one trader in a thousand ever 
becomes so expert or so seasoned as 
to entirely overcome the influence his 
position in the market exerts upon his 
judgment. That influence appears in 
the most insidious and elusive ways. 
One of the principal difficulties of the 
expert is in preventing his active im- 
agination from causing him to see 
what he is looking for just because he 
is looking for it. 

An example will make this clear. 


The expert has learned from experi- 
ence, let us say, that the appearance 
of "holes" in the market is a sign of 
weakness. By a "hole" is meant a 
condition of the market where it sud- 
denly and unaccountably refuses to 
take stock. A few hundred shares of 
an active stock are offered for sale. 
Sentiment is generally bullish, but 
there is no buyer for that stock. Prices 
slip quickly down half a point or a 
point before buyers are found. This, 
in an active stock, is unusual; and al- 
though the price may recover, the pro- 
fessional does not forget this treacher- 
ous failure of the market to accept 
moderate offerings. He considers it a 
sign of an "over-bought" market. 

Now suppose the trader has calcu- 
lated that an advance is about to cul- 
minate and has taken the short side 
in anticipation of that event. He sus- 
pects that the market is over-bought, 
but is not yet sure of it. Under these 
circumstances any little dip in the 
price will perhaps look to him like a 
u hole," even though under other con- 


ditions he would not notice it or would 
think nothing about it. He is looking 
for the development of weakness and 
there is danger that his imagination may 
show him what he is looking for even 
though it isn't there! 

The same remarks would apply to 
the detection of accumulation or dis- 
tribution. If you want to see distribu- 
tion after a sharp advance, you are 
very likely to see it. If you have sold 
out and want to get a reaction on which 
to repurchase, you will see plenty of 
indications of a reaction. Indeed, it 
is a sort of proverb in Wall Street that 
there is no bear so bearish as a sold- 
out bull who wants a chance to re- 

In the study of so-called "technical" 
conditions of the market, a situation 
often appears which permits a double 
construction. Indications of various 
kinds are almost evenly balanced ; some 
things might be interpreted in two dif- 
ferent ways; and a trader not already 
interested in the market would be likely 


to think it wise to stay out until 
he could see his way more clearly. 

Under such circumstances you will 
find it an almost invariable rule that 
the man who was long before this con- 
dition arose will interpret technical 
conditions as bullish, while the man 
who was and remains short, sees plain 
indications of technical weakness. 
Somewhat amusing, but true. 

In this matter of allowing the judg- 
ment to be influenced by personal com- 
mitments, very little of a constructive 
or practically helpful nature can be 
written, except the one word "Don't." 
Yet when the investor or trader has 
come to realize that he is a prejudiced 
observer, he has made progress; for 
this knowledge keeps him from trust- 
ing too blindly to something which, at 
the moment, he calls judgment, but 
which may turn out to be simply an 
unusually strong impulse of greed. 

It has often been noted by stock mar- 
ket writers that since the great public 
is bearish at the bottom and bullish at 
the top, it could make its fortune and 


beat the multi-millionaires at their own 
game by simply reversing itself — buy- 
ing when it feels like selling and selling 
when it feels like buying. Tom Law- 
son, in the heyday of his publicity, 
seems to have had some sort of dream 
of the public selling back to Standard 
Oil capitalists the stocks which it had 
bought from them and thus bringing 
everything to smash in a heap — the 
philanthropic Thomas, doubtless, being 
first properly short of the market. 

This wrongheadedness of the public 
no longer exists to the same extent as 
formerly. A great number of small in- 
vestors buy and sell intelligently and 
there has been a most noticeable falling 
off in the gambling class of trade — 
much to the satisfaction of everyone, 
except, perhaps, the brokers who form- 
erly handled such business. 

It remains true, nevertheless, that 
the very moment when the market 
looks strongest, is likely to be near the 
top, and just when prices appear to 
have started on a straight drop to the. 
zero point is usually near the bottom 


The practical way for the investor to 
use this principle is to be ready to 
sell at the moment when bull sentiment 
seems to be most widely distributed, 
and to buy when the public in general 
seem most discouraged. It is especially 
important for him to bear this principle 
in mind in taking profits on previous 
commitments, as his own interests are 
then identified with the current trend 
of prices. 

In a word, the trader or investor who 
has studied the subject enough to be 
reading this book, probably could 
not make profits by reversing him- 
self, even if such a thing were 
possible; but he can endeavor to hold 
himself in a detached, unprejudiced 
frame of mind, and to study the psy- 
chology of the crowd, especially as it 
manifests itself in the movement of 

VI— The Panic and the Boom 

BOTH the panic and the boom are 
eminently psychological phe- 
nomena. This is not saying 
that fundamental conditions do not at 
times warrant sharp declines in prices 
and at other times equally sharp ad- 
vances. But the panic, properly so- 
called, represents a decline greater 
than is warranted by conditions, usu- 
ally because of an excited state of the 
public mind, accompanied by exhaus- 
tion of resources; while the term 
"boom" is used to mean an excessive 
and largely speculative advance. 

There are some special features con- 
nected with the panic and the boom 
which are worthy of separate consider- 

It is really astonishing w r hat a hold 
the fear of a possible panic has upon 
the minds of many investors. The 


memory of the events of 1907 has un- 
doubtedly operated greatly to lessen 
the volume of speculative trade from 
that time to the present (April, 1912). 
Panics of equal severity have occurred 
only a few times in the entire history 
of the country, and the possibility of 
such an outbreak in any one month is 
smaller than the chance of loss on the 
average investment through the failure 
of the company. Yet the specter of 
such a panic rises in the minds of the 
inexperienced whenever they think of 
buying stocks. 

"Yes," the investor may say, "Read- 
ing seems to be in a very strong posi- 
tion, but look where it sold in 1907 — 
at $70 a share I" 

It is sometimes assumed that the 
low prices in a panic are due to a sud- 
den spasm of fear, which comes quickly 
and passes away quickly. This is not 
the case. In a way, the operation of 
the element of fear begins when prices 
are near the top. Some cautious in- 
vestors begin to fear that the boom is 


being overdone and that a disastrous 
decline must follow the excessive spec- 
ulation for the rise. They sell under 
the influence of this feeling. 

During the ensuing decline, which 
may run for years, more and more 
people begin to feel uneasy over busi- 
ness or financial conditions, and they 
liquidate their holdings. This caution 
or fearfulness gradually spreads, in- 
creasing and decreasing in waves, but 
growing a little greater at each succes- 
sive swell. The panic is not a sudden 
development, but is the result of causes 
long accumulated. 

The actual bottom prices of the panic 
are more likely to result from necessity 
than from fear. Those investors who 
could be frightened out of their hold- 
ings are likely to give up before the 
bottom is reached. The lowest prices 
are usually made by sales for those 
whose immediate resources are ex- 
hausted. Most of them are taken by 
surprise and could raise the money nec- 
essary to carry their stocks if they had 


a little time; but in the stock market, 
"time is the essence of the contract/' 
and is the very thing that they cannot 

The great cause of loss in times of 
panic is the failure of the investor to 
keep enough of his capital in liquid 
form. He becomes "tied up" in various 
undertakings so that he cannot realize 
quickly. He may have abundant prop- 
erty, but no ready money. This condi- 
tion, in turn, results from trying to do 
too much — greed, haste, excessive am- 
bition, an oversupply of easy confidence 
as to the future. 

It is noticeable in panic times that 
a period arrives when nearly every one 
thinks that stocks are low enough, yet 
prices continue downward to a still 
lower level. The result is that many 
investors, after thinking that they have 
"loaded up" near the bottom, find that 
it was a false bottom, and are finally 
forced to throw over their holdings on 
a further decline. 

This is due to the fact mentioned 


above, that final low prices are the re- 
sult of necessities, not of opinions. In 
1907, for example, every one of good 
sense knew perfectly well that stocks 
were selling below their value — the 
trouble was that investors could not 
get hold of the money with which to 

The moral is that low prices, after 
a prolonged bear period, are not in 
themselves a sufficient reason for buy- 
ing stocks. The key to the situation 
lies in the accumulation of liquid capital, 
which is most quickly evidenced by a 
rapid recovery of the excess of deposits 
over loans in the New York clearing 
house banks (excluding the trust com- 
panies, in which loans are more varied). 
This subject, however, takes us outside 
our present field. 

It is to a great extent because the 
last part of the decline in a panic has 
been caused not by public opinion, or 
even by public fear, but by necessity, 
arising from absolute exhaustion of 
available funds, that the first part of 


the ensuing recovery takes place with- 
out any apparent reason. 

Traders say, "The panic is over, but 
stocks cannot go up much under such 
bearish conditions as now exist." Yet 
stocks can and do go up, because they 
are merely regaining the natural level 
from which they were depressed by 
"bankrupt sales," as we would say in 
discussing dry goods. 

Perhaps the word "fear" has been 
overworked in the discussion of stock 
market psychology. It is only the very 
few who actually sell their stocks un- 
der the direct influence of the emotion 
of fear. But a feeling of caution strong 
enough to induce sales, or even a fixed 
belief that prices must decline, con- 
stitutes in itself a sort of modification 
of fear, and has the same result so far 
as prices are concerned. 

The efifect of this fear or caution in a 
panic is not limited to the selling of 
stocks, but is even more important in 
preventing purchases. It takes far less 
uneasiness to cause the intending in- 


vestor to delay purchases than to pre- 
cipitate actual sales by holders. For 
this reason, a small quantity of stock 
pressed for sale in a panicky market 
may cause a decline out of all propor- 
tion to its importance. The offerings 
may be small, but nobody wants them. 

It is this factor which accounts for 
the rapid recoveries which frequently 
follow panics. Waiting investors are 
afraid to step in front of a demoralized 
market, but once the turn appears, they 
fall over each other to buy. 

The boom is in many ways the re- 
verse of the panic. Just as fear keeps 
growing and spreading until the final 
crash, so confidence and enthusiasm 
keep reproducing each other on a wider 
and wider scale until the result is a 
sort of hilarity on the part of thousands 
of men, many of them comparatively 
young and inexperienced, who have 
"made big money'' during the long ad- 
vance in prices. 

These imaginary millionaires appear 
in a small swarm during every pro- 


longed bull market, only to fall with 
their wings singed as soon as prices 
decline. Such speculators are, to all 
practical intents and purposes, irrespon- 
sible. It is their very irresponsibility 
which has enabled them to make money 
so rapidly on advancing prices. The 
prudent man gets only moderate profits 
in a bull market — it is the man who 
trades on "shoe-string margins" who 
gets the biggest benefit out of the rise. 

When such mushroom fortunes have 
accumulated, the market may fall tem- 
porarily into the hands of these dare- 
devil spirits, so that almost any reck- 
lessness is possible for the time. It is 
this kind of buying which causes prices 
to go higher after they are already high 
enough — just as they go lower in a 
panic after they are plainly seen to be 
low enough. 

When prices get above the natural 
level, a well-judged short interest be- 
gins to appear. These shorts are right, 
but right too soon. In a genuine bull 
market they are nearly always driven 


to cover by a further rise, which is, 
from any common sense standpoint, un- 
reasonable. A riot of pyramided mar- 
gins drives the sane and calculating 
short seller temporarily to shelter. 

A psychological influence of a much 
wider scope also operates to help a bull 
market along to unreasonable heights. 
Such a market is usually accompanied 
by rising prices in all lines of business 
and these rising prices always create, 
in the minds of business men, the im- 
pression that their various enterprises 
are more profitable than is really the 

One reason for this false impression 
is found in stocks of goods on hand. 
Take the wholesale grocer, for ex- 
ample, carrying a stock of goods which 
inventories $10,000 in January, 1909. 
On that date Bradstreet's index of com- 
modity prices stood at 8.26. In Jan- 
uary, 1910, Bradstreet's index was 9.23. 
If the prices of the various articles in- 
cluded in this stock of groceries in- 
creased in the same ratio as Brad- 


street's list, and if the grocer had on 
hand exactly the same things, he would 
inventory them at about $11,168 in 
January, 1910. 

He made an additional profit of 
$1,168 during the year without any ef- 
fort, and probably without any calcu- 
lation, on his part. But this profit was 
only apparent, not real; for he could 
not buy any more with the $11,168 in 
January, 1910, than he could have 
bought with the $10,000 in January, 
1909. He is deceived into supposing 
himself richer than he really is, and 
this false idea leads to a gradual 
growth of extravagance and specula- 
tion in every line of business and every 
walk of life. 

The secondary results of this delu- 
sion of increased wealth because of ris- 
ing prices, are even more important 
than the primary results. Our grocer, 
for example, decides to spend this 
$1,168 for an automobile. This helps 
the automobile business. Hundreds of 
similar orders induce the automobile 


company to enlarge its plant. This 
means extensive purchases of material 
and employment of labor. The in- 
creased demand resulting from a sim- 
ilar condition of things in all depart- 
ments of industry produces, if other 
conditions are favorable, a still further 
rise in prices; hence at the end of an- 
other year the grocer perhaps has an- 
other imaginary profit, which he 
spends in enlarging his residence or 
buying new furniture, etc. 

The stock market feels the reflection 
of all this increased business and 
higher prices. Yet the whole thing is 
psychological, and sooner or later our 
grocer must earn and save, by hard 
work, economical living and shrewd 
calculation, the amount he has paid for 
his automobile or furniture. 

Again, rising stock prices and rising 
commodity prices react on each other. 
If the grocer, in addition to his im- 
aginary profit of $1,168 sees a ten per 
cent, advance in the prices of various 
securities which he holds for invest- 


ment, he is encouraged to still larger 
expenditures; and likewise if the capi- 
talist notes a ten per cent, advance in 
the stock market, he perhaps employs 
additional servants and enlarges his 
household expenditures so that he buys 
more groceries. Thus the feeling of 
confidence and enthusiasm spreads 
wider and wider like ripples from a 
stone dropped into a pond. And all of 
these developments are faithfully re- 
flected by the stock market barometer. 
The result is that, in a year like 1902 
or 1906, the high prices for stocks and 
the feverish activity of general trade 
are based, to an entirely unsuspected 
extent, on a sort of pyramid of mis- 
taken impressions, most of which may 
be traced, directly or indirectly, to the 
fact that we measure everything in 
money and always think of this money- 
measure as fixed and unchangeable, 
while in reality our money fluctuates 
in value just like iron, potatoes, or 
"Fruit of the Loom." We are accus- 
tomed to figuring the money-value of 


wheat, but we get a headache when we 
try to reckon the wheat-value of 

When a fictitious situation like this 
begins to go to pieces, the stock mar- 
ket, fulfilling its function of barometer, 
declines first, while general business 
continues active. Then the "money 
sharks of Wall Street" get themselves 
roundly cursed by the public and there 
is a widespread desire to wipe them ofif 
the earth in summary fashion. The 
stock market never finds itself popular 
unless it is going up; yet its going 
down undoubtedly does far more to 
promote the country's welfare in the 
long run, for it serves to temper the 
crash which must eventually come in 
general business circles and to fore- 
warn us of trouble ahead so that we 
may prepare for it. 

It is generally more difficult to dis- 
tinguish the end of a stock market 
boom than to decide when a panic is 
definitely over. The principle of the 
thing is simple enough, however. It 


was an oversupply of liquid capital that 
started the market upward after the 
panic was over. Similarly it is exhaus- 
tion of liquid capital which brings the 
bull movement to an end. This ex- 
haustion is shown by higher call money 
rates, loss of the excess of deposits over 
loans in New York clearinghouse 
banks, a steady rise in commercial pa- 
per rates, and a sagging market for 
high-grade bonds. 

VII— The Psychology of Scale 

THE observer of market conditions 
soon comes to know that there 
are two general classes of minds 
whose operations are reflected in 
prices. These classes might be named 
the "impulsive" and the ''phlegmatic. " 
The "impulsive" operator says, for 
example, "Conditions, both funda- 
mental and technical, warrant higher 
prices. Stocks are a purchase." Hav- 
ing formed this conclusion, he proceeds 
to buy. He does not try or expect to 
buy at the bottom. On the contrary 
he is perfectly willing to buy at the top 
so far, provided he sees prospects of a 
further advance. When he concludes 
that conditions have turned bearish, or 
that the advance in prices has overdis- 
counted previous conditions, he sells out. 
The "phlegmatic" type of investor, 


on the other hand, can hardly ever be 
persuaded to buy on an advance. He 
reasons, 'Trices frequently move sev- 
eral points against conditions, or at 
least against what the conditions seem 
to me to be. The sensible thing for me 
to do is to take advantage of these con- 
trary movements. " 

Hence when he believes stocks 
should be bought he places an order 
to buy on a scale. His thought is : 

"It seems to me stocks should ad- 
vance from these prices, but I am not 
a soothsayer, and prices have often 
declined three points when I felt just 
as bullish as I do now. So I will place 
orders to buy every half point down 
for three points. These speculators 
are a crazy lot and there is no know- 
ing what passing breeze might strike 
them that would cause a temporary de- 
cline of a few points. " 

Among large capitalists, and espe- 
cially in the banking community, the 
"phlegmatic" type naturally predom- 
inates. Such men have neither the 


time nor the disposition to watch the 
ticker closely and they nearly always 
disclaim any ability to predict the 
smaller movements of prices. They 
are entirely ready, nevertheless, to take 
advantage of these small fluctuations 
when they occur, and having plenty of 
capital, they can easily accomplish this 
by buying or selling on a scale. 

As a matter of fact, the market is 
usually full of scale orders, and the 
knowledge of this and of the way in 
which such orders are handled is de- 
cidedly helpful in judging the tone and 
technical position of the market from 
day to day. 

The two types of operators above 
described are always working against 
each other. The buying or selling of 
the "impulsive" trader tends to force 
prices up or down, while the scale or- 
ders of the "phlegmatic" class tend to 
oppose any movement. 

For example, let us suppose that 
banking interests believe conditions to 
be fundamentals sound and that the 


general trend of the market will be up- 
ward for some time to come. Orders 
are therefore placed by various per- 
sons to buy stocks every point down, 
or every half, quarter, or even eighth 
point down. 

On the other hand, the active floor 
traders find that, owing to some tem- 
porary unfavorable development, a fol- 
lowing can be obtained on the bear 
side. They perceive the presence of 
scale orders, but they think stocks enough 
will come out on the decline to fill the 
scale orders and leave a balance over. 

To put it another way, the floating 
supply of stocks has become, at the 
moment, larger than can comfortably 
be tossed about from hand to hand by 
the in-and-out class of traders. The 
market must decline until a part of this 
floating supply is absorbed by the scale 
orders which underlie current prices. 

These conditions produce what is 
commonly called a "reaction." Once 
this surplus floating supply of stocks 
is absorbed by standing orders, the 


market is ready to start upward again. 
If the general trend is upward, far less 
resistance will be encountered on the 
advance than was met on the reaction ; 
hence prices rise to a new high level. 
Then profit-taking sales will be met, 
on limited or scale orders at various 
prices, and as the market advances the 
floating supply will gradually increase 
until it again becomes unwieldy and 
another reaction is necessary. 

Eventually a level is reached, or 
some change in conditions appears, 
which causes these scale buying orders 
to be partially or entirely withdrawn, 
and selling orders to be substituted on 
a scale up. The bull market will not 
go much further after this change 
takes place. It has now become easier 
to produce declines than advances. 
The situation is the reverse of that de- 
scribed above, and a bear market follows. 

Commonly there is a considerable 
period around top prices when scale 
buying orders are still found on de- 
clines, but profit-taking sales are also 


met on advances, so that the market is 
kept fluctuating within comparatively 
narrow limits for a month or more. In 
fact, it is likely to be kept on this level 
so long as public buying continues 
greater than public selling. This is 
sometimes called "distribution. " A 
similar period of "accumulation" often 
occurs after a bear market has run its 
course, and before any important ad- 
vance appears. 

A close watch of transactions, or a 
study of continuous quotations as pub- 
lished in certain newspapers, often en- 
ables the experienced trader to discover 
when the most important of these scale 
orders are withdrawn or reversed. 

A bull market which is full of scale 
buying orders encounters "support/'' 
so-called, on declines. Bears are timid 
about driving down prices, because 
they are continually "losing their 
stocks." They say that "very little 
stock comes out on declines"; hence 
there is a certain appearance of caution 
in the way the market goes down, and 


the activity of trade shows, in a broad 
way, a falling off at lower prices. On 
the advances, however, a following is 
obtained and activity increases. 

Toward the end of the bull market 
a change is noticeable. Prices go 
down easily and on larger transactions, 
while advances are sluggish and oppo- 
sition is met at higher levels where 
profit-taking orders have been placed. 
The very day when scale buying or- 
ders in a stock are withdrawn can 
oftentimes be distinguished. 

In a bear market, "pressure" appears 
in place of "support." The scale or- 
ders are mostly to sell as the market 
rises. Only a small following of pur- 
chasers is obtainable on advances, 
hence the activity of business, in a gen- 
eral way, falls off as prices go up. 
The end of the bear market is marked 
by the reappearance of "support" and 
the removal of "pressure," so that 
prices rebound quickly and sharply 
from declines. 

The common assumption is that this 


"support" or "pressure" is supplied by 
"manipulators." But it is quite as 
likely to result from the scale opera- 
tions of hundreds of different persons, 
whose mental make-up prevents them 
from buying or selling in the "im- 
pulsive" way. 

VIII— The Mental Attitude of the 

IN previous chapters we have seen 
that many, if not most, of the ec- 
centricities of speculative markets, 
commonly charged to manipulation, 
are in. fact due to the peculiar psycholog- 
ical conditions which surround such 
markets. Especially, and more than all 
else together, these erratic fluctuations 
are the result of the efforts of traders 
to operate, not on the basis of facts, 
nor on their own judgment as to the 
effect of facts on prices, but on what 
they believe will be the probable effect 
of facts or rumors on the minds of 
other traders. This mental attitude 
opens up a broad field of conjecture, 
which is not limited by any definite 
boundaries of fact or common sense. 

Yet it would be foolish to assert that 
assuming a position in the market 
based on what others will do is a wrong 


attitude. It is confusing to the uniniti- 
ated, and first efforts to work on such 
a plan are almost certain to be disas- 
trous; but for the experienced it be- 
comes a successful, though of course 
never a certain, method. A child's first 
efforts to use a sharp tool are likely to 
result in bloodshed, but the same tool 
may trace an exquisite carving in the 
hands of an expert. 

What, then, should be the mental at- 
titude of the intelligent buyer and 
seller of securities? 

The "long pull" investor, buying out- 
right for cash and holding for a liberal 
profit, need only consider this matter 
enough to guard against becoming con- 
fused by the vagaries of public senti- 
ment or by his own inverted reasoning 
processes. He will get the best results 
by keeping his eye single to two things : 
Facts and Prices. The current rate of 
interest, the earning power of the cor- 
porations whose stocks he buys, the 
development of political conditions as 
affecting invested capital, and the re- 


lation of current prices to the situation 
as shown by these three factors — these 
constitute the most important food for 
his mind to work upon. 

When he finds himself wandering off 
into a consideration of what "They" 
will do next, or what effect such and 
such events may have on the sentiment 
of speculators, he cannot do better 
than to bring himself up with a short 
turn and sternly bid himself "Back to 
common sense." 

For the more active trader the situa- 
tion is different. He need not be en- 
tirely unregardful of values or funda- 
mental conditions, but his prime object 
is to "go with the tide." That means 
basing his operations to a great extent 
on what others will think and do. His 
own mental attitute, then, is a most im- 
portant part of his equipment for 

First, the trader must be a reasoning 
optimist. A more horrible fate can 
scarcely be imagined than the shallow 
pessimism of many market habitues, 
whose minds, incapable of grasping the 


larger forces beneath the movements 
of prices, take refuge in a cynical dis- 
belief in pretty much everything that 
makes life worth living. 

Owing to the nature of the business, 
however, this optimism must be of a 
somewhat different character from that 
which brings success in other lines. As 
a general thing optimism includes the 
persistent nourishing of hope, an ag- 
gressive confidence, the certainty that 
you are right, a firm determination to 
accomplish your end. But you cannot 
make the stock market move your way 
by believing that it will do so. Here 
is one case, at any rate, where New 
Thought methods cannot be directly 

In the market you are nothing but 
a chip on the tide of events. Optimism, 
then, must consist in believing, not 
that the tide will continually flow your 
way, but that you will succeed in float- 
ing with the tide. Your optimism must 
be, in a sense, of the intellect, not of 
the will. An optimism based on deter- 


mination would, in this case, amount 
to stubbornness. 

Another quality that makes for suc- 
cess in nearly every line of business is 
enthusiasm. For this you have abso- 
lutely no use in the stock market. The 
moment you permit yourself to become 
enthusiastic, you are subordinating 
your reasoning powers to your beliefs 
or desires. 

Enthusiasm helps you influence other 
men's minds, but in the market you do 
not desire to do this (unless you hap- 
pen to be a big bull leader). You wish 
to keep your mind as clear, cool and 
unruffled as the surface of a mountain 
lake on a calm day. Any emotion — en- 
thusiasm, fear, anger, depression — will 
only cloud the intellect. 

Doubtless it, would be axiomatic to 
warn the trader against stubbornness. 
It cannot be assumed that any operator 
would consciously permit himself to 
become stubborn. The trouble arises 
in drawing the line between, on the 
one hand, persistence, consistence, pur- 


suit of a definite plan until conditions 
change; and, on the other, stubborn ad- 
herence to a course of action which 
subsequent events have proved to be 

A day in the country, with the mar- 
ket forgotten, or if necessary forcibly 
ejected from the thoughts, will often 
enable the trader to return with a clari- 
fied mind, so that he can then intelligent- 
ly convict or acquit himself of the vice of 
stubbornness. Sometimes it may be- 
come necessary to close all commit- 
ments and remain out of the market 
for a few days. 

One of the most common errors 
might be described as "getting a no- 
tion." This is due to the failure or in- 
ability of the trader to take a broad 
view of the entire situation. Some 
particular point in the complex condi- 
tions which usually control prices, ap- 
peals to him strongly and impresses 
him as certain to have its effect on the 
market. He acts on this single idea. 
The idea may be all right, but other 


counterbalancing factors may prevent 
it from having its natural effect. 

You encounter these "notions" every- 
day in the Street. You meet a highly 
conservative individual and ask him 
what he thinks of the situation. "I am 
alarmed at the rapid spread of radical 
sentiment/' he replies. "How can we 
expect capital to branch out into new 
enterprises when the profits may be 
swept away at any moment by social- 
istic legislation?" 

You say mildly that the crops are 
good, the banking situation sound, bus- 
iness active, etc. But all this produces 
no impression upon him. He has sold 
all his stocks and has his money in the 
banks. (He is also short a consider- 
able line, but he doesn't tell you this). 
He will not buy again until the public 
becomes "sane." 

The next man you talk with says : 
"We cannot have much decline with 
the present good crop prospect. Crops 
lie at the basis of everything. With 
nine billions of new wealth coming out 


of the ground and flowing into the 
channels of trade, we are bound to 
have prosperous conditions for some 
time to come." 

You speak of radicalism, adverse leg- 
islation, high cost of living, etc. ; but 
he thinks these are relatively unim- 
portant compared with that $9,000,- 
000,000 of new wealth. Of course, he 
is long of stocks. 

"To make the worse appear the bet- 
ter reason/' said Mr. Socrates, some 
little time ago. It is too bad we can't 
have Socrates' comments on Wall 
Street. The Socratic method applied 
to the average speculator would pro- 
duce amusing results. 

Beware of saying, "This is the most 
important factor in the situation," un- 
less the action of the market shows 
that others agree with you. Every 
human mind has its own peculiarities, 
so presumably yours has, though you 
can't see them plainly; but the stock 
market is the meeting of many minds, 
having every imaginable peculiarity. 


However important some single factor 
in the situation may appear to you, it 
is not going to control the movement 
of prices regardless of everything else. 

An exaggerated example of "getting 
a notion" is seen in the so-called 
"hunch." This term appears to mean, 
when it means anything, a sort of sud- 
den welling up of instinct so strong as 
to induce the trader to follow it regard- 
less of reason. In many cases, the 
"hunch" is nothing more than a strong 

Almost any business man will say 
at times, "I have a feeling that we 
ought not to do this," or "Somehow I 
don't like that proposition," without 
being able to explain clearly the 
grounds for his opposition. Likewise the 
"hunch" of a man who has watched 
the stock market for half a lifetime 
may not be without value. In such a 
case it doubtless represents an accu- 
mulation of small indications, each so 
trifling or so evasive that the trader 


cannot clearly marshal and review 
them even in his own mind. 

Only the experienced trader is en- 
titled to a "hunch." The novice, or the 
man who is not closely in touch with 
technical conditions, is merely making 
an unusual ass of himself when he 
talks about a "hunch." 

The successful trader gradually 
learns to study his own psychological 
characteristics and allow to some ex- 
tent for his customary errors of judg- 
ment. If he finds that he is generally 
too hasty in reaching a conclusion, he 
learns to wait and reflect further. 
After making his decision, he with- 
draws it and lays it up on a shelf to 
ripen. He makes only a part of his full 
commitment at the moment when he 
feels most confident, holding the re- 
mainder in reserve. 

If he finds that he is usually over- 
cautious, he eventually learns to be a 
little more daring, to buy a part of his 
line while his mind is still partially en- 
veloped in the mists of doubt. 


Most of the practical suggestions 
which can be offered are necessarily of 
a somewhat negative character. We 
can point out the errors to be avoided 
much more successfully than we can 
lay out a course of positive action. But 
the following summary may be useful 
to the active trader: 

(1) Your main purpose must be to 
keep the mind clear and well balanced. 
Hence, do not act hastily on apparently 
sensational information; do not trade 
so heavily as to become anxious ; and 
do not permit yourself to be influenced 
by your position in the market. 

(2) Act on your own judgment, or 
else act absolutely and entirely on the 
judgment of another, regardless of 
your own opinion. "Too many cooks 
spoil the broth." 

(3) When in doubt, keep out of the 
market. Delays cost less than losses. 

(4) Endeavor to catch the trend of 
sentiment. Even if this should be tem- 
porarily against fundamental condi- 


tions, it is nevertheless unprofitable to 
oppose it. 

(5) The greatest fault of ninety-nine 
out of one hundred active traders is 
being bullish at high prices and bear- 
ish at low prices. Therefore, refuse to 
follow the market beyond what you 
consider a reasonable climax, no mat- 
ter how large the possible profits that 
you may appear to be losing by inac- 

The field covered by these chapters 
is to a great extent new. As it be- 
comes more thoroughly cultivated, it 
may be possible to speak with more 
scientific definiteness. In the mean- 
time, the author hopes that his com- 
ments and suggestions may be of some 
service in helping readers to avoid un- 
wise risks and to apply sound prin- 
ciples of analysis to the investment or 
speculative situation. 



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